Government Response to the Tenth Report
of the House of Lords Select Committee on the European Union,
Session 2003-03

MID-TERM REVIEW OF THE COMMON AGRICULTURAL
POLICY

This reply to the House of Lords European Union Select
Committee's report on Mid-Term Review of the Common Agricultural
Policy: external implications (HL 62) is submitted on behalf of
the Government by the Department for Environment, Food and Rural
Affairs. The response addresses the recommendations as they are
laid out in the report's summary of conclusions and recommendations
(report text shown in bold below). The numbers refer to the paragraph
number in which the recommendations appear in the report.

104. It is essential that the Commission's
recommendations on decoupling are agreed and applied in advance
of the eastward enlargement from 2004 to ensure that any stimulation
of production resulting from the application of EU agriculture
policy is minimised (paragraph 42).

We share the Committee's view. Decoupling will remove
the perverse incentives to over-production in the current system
and allow producers in both new and old Member States, to optimise,
rather than maximise, production. Furthermore decoupling will
also minimise the distortion of market signals in the accession
countries when the CAP is extended to them. Many of the accession
countries' agricultural sectors are in need of significant restructuring.
We believe enhanced rural development measures would be the best
way to support them.

105. A necessary corollary to decoupling of
subsidies from production is the abolition of market intervention
and export subsidies. Change in emphasis from production and market
support to the stimulation of structural change through modulation
is even more essential in eastern European than in the EU15 (paragraph
43).

In general it is true that the new Member States
need to restructure their agriculture even more than the EU15.
The predominant structure of farming in the new Member Stateslarge
numbers of small holdings with limited interaction with the marketsmeans
that their agricultural productivity tends to lag some way behind
levels in the EU15. This is why direct payments are being phased
in and why the new Member States are being offered a broader and
more generous rural development instrument. Rural development
commitments for the new Member States are in excess of direct
payment commitments for the period 2004-2006this should
help to prevent ossification of their current structure of farming.
Furthermore, beneficial co-financing terms and an extended and
adapted rural development regulation between 2004-2006 should
help candidates further to restructure and to modernise their
agricultural economies in their first years after Accession. Contrary
to the implications of paragraph 102 of the report on decoupling,
Poland has stated it intends to make use of the option available
to new Member States to apply a flat rate, decoupled direct payment
system and others are at least giving consideration to following
suit. The UK supports the gradual reduction in CAP market support
which will benefit the whole of the enlarged EU.

106. As we recommend in paragraph 91, modulation
should involve a larger proportion than the maximum of 6 per cent
to be removed from direct subsidies and transferred to structural
measures, and this should take place at a faster rate than the
seven years (effectively ten, since the transfer would not start
until 2007) recommended by the Commission (paragraph 46).

The Government agrees that the proposed level of
modulation funds to be made available for rural development may
not be sufficient for a strengthened second pillar. We have led
calls for a faster and larger transfer of funds to the second
pillar. At the time of writing, the outcome of Council negotiations
on CAP reform is not known.

107. Serious consideration should also
be given to transferring funds to Pillar 2 policies in the new
Member States at a greater rate than in the EU15, possibly by
skimming off a percentage of the yield from modulation in the
current Member States (paragraph 47).

The Commission proposal to transfer funds from direct
payments to rural development is vital to meet our objectives
for rural areas in the EU15; in fact we have called for a more
signification transfer of resources. The new Member States will
benefit from a more generous rural development instrument in the
2004-06 period as a result of the accession negotiations. We can
look again at levels of Rural Development commitments when we
come to set levels post-2006. We would want such allocations to
be based on objective criteria. The UK receives an unfairly small
share of Rural Development funds and we are actively seeking to
increase this.

108. Urgent consideration should be given
to the formulation of proposals for the reform of the market regime
for sugar and dairy products, which have particularly important
implications for the new Member States. We consider the Commission's
recent proposals (January 2003) for the dairy sector to be completely
inadequate; they leave the market unliberalised and the market
distorting intervention and export subsidisation mechanisms intact.
They also go against earlier understandings under Agenda 2000
(paragraph 50).

109.Proposals
for these two sectors should involve, most essentially, plans
for the rapid phasing out of the delivery and production quotas
linked to stepped cuts in support prices with a view to rapid
abolition of market support and export subsidisation. A short
time limit should be set for the further operation of milk and
sugar quotas. Compensation for the removal of support should be
incorporated into the plans for the payment of decoupled income
subsidies (paragraph 51).

112. Urgent consideration should be given
to the formulation of proposals for the reform of the market regimes
for dairy products and sugar. We do not regard the latest proposals
for modification of the dairy common market organisation as a
valid contribution to trade liberalisation. These should involve,
most essentially, plans for the rapid phasing out of the delivery
and production quotas in both sectors, linked to stepped cuts
in support prices with a view to rapid abolition of market support
and export subsidisation (paragraph 59).

Paragraphs 108, 109 and 112 (sugar aspects)

On sugar, the Government agrees that a high priority
should be given to early and radical reform of the EU regime.
The Commission has indicated that their report and conclusions
will be issued shortly, and we welcome this. The Government believes
that the current EU Regime, based on high internal prices, import
controls and export subsidies, is unsustainable.

If the present CAP reform proposals for other sectors,
including decoupled payments to farmers, are agreed this summer,
we hope and expect that sugar would follow this model.

Paragraphs 108,109, and 112 (dairy aspects)

On milk, the Government shares the Sub-Committee's
disappointment that the Commission has proposed the extension
of quotas to 2015, despite the clear mandate from the Berlin Council
for their abolition. However, the price cuts proposed, which go
much further than those agreed under Agenda 2000, are welcome
as a stage towards the abolition of quotas, and a more market-orientated
milk regime. (In our assessment, the cuts would probably result
in the alignment of EC skimmed milk prices with those on the world
market by 2008/09, although additional cuts of around 12% would
still be required for butter). We agree that the direct aid in
compensation for the milk price cuts should be decoupled, and
therefore support the Commission's proposal to integrate the dairy
premium into the single income payment.

111. It is essential that the European Union
agrees the proposals for the decoupling of subsidies from production.
This is the only way that the EU can present a credible proposal
to what is intended to be a "Development Round"in
other words providing real agricultural trade advantages to less
developed countriesand strengthen its own negotiating position.
We do not regard the Commission's draft current minimal EU proposal
to Geneva as a valid contribution to progress, since it is based
on the assumption that present methods of agricultural support
will be maintained and that the EU will continue to support markets,
subsidise exports and maintain prohibitive import barriers (paragraph
57).

The Government supports decoupling of subsidies from
production. We believe that the EU's current proposals on agricultural
trade, submitted to the WTO in January, offer a valid contribution
to the negotiating process although we share the Committee's views
that we will need to move further. Decoupling would provide the
opportunity.

114. The EU has a responsibility towards the
world community, particularly towards less prosperous members,
which it has yet to address properly. We share DfID's disappointment
that the Commission has not looked in more detail at the impact
of its proposals on developing countries. If there is to be any
gain for the less developed countries in the mid-term review process
it has to come from a significant reduction in the level of EU
subsidisation of production. Only in this way can subsidised competition
in the domestic markets of these countries and on the international
market be reduced. For this reason it is not only necessary that
the EU's subsidies be detached from production, but also that
the level of subsidy payment to the individual producer be reduced.
It is clear that large subsidies to large farms are a positive
incentive to low cost production which will continue to undercut
international marketswhatever from the subsidy may take.
We deplore the complacent attitude of a number of Member States'
governments to this problem, as revealed in the seven ministers'
open letter of 23 September (paragraph 77).

The Government shares the Committee's concern for
the less prosperous members of the world community and agree that
if the current proposals for CAP reform are to offer any real
gain to less developed countries it can only come through significant
reductions in production-related subsidies. The Doha Trade Round
commits all member countries to substantial reductions in market
protection and trade-distorting subsidies and we support the current
CAP reform initiative as a means to helping achieve this.

115. We therefore recommend that in order
to act as intended, as an income subsidy only, the level of subsidy
receipts allowed to individual holdings should be capped, as originally
proposed, but at a much lower rate than that recommended by the
Commission. The converted subsidy should be utilised only as a
transitional income supplement, to be used only where hardship
is created by elimination of EU support to production or in economically
disfavoured areas (paragraph 78).

The UK did not support the Commission's earlier idea
to cap the subsidies available to large farms. This would discriminate
against the UK, which has more such farms than most other Member
States, and discriminate against employed labour which tends to
be more important on the larger farms. We will argue for a fair,
transparent and simple method of degression with flat-rate, across-the-board
reductions. Our experience of administering modulation in the
UK supports this approach. A simpler approach would avoid these
discriminatory impacts, encourage efficient restructuring in rural
areas and provide a simple way of raising funds for rural development.

116. As part of the mid-term review the EU
must abandon its direct subsidisation of exports and scale down
its import tariffs. Developing country trade is particularly affected
by the EU's subsidised exports of wheat, dairy products and sugar.
It is therefore all the more essential that the EU abandons its
direct subsidisation of these exports and takes early steps to
reform its dairy and sugar market regimes which remain the two
outstanding examples of unreconstructed common market organisations.
The Commission's January 2003 proposal to continue dairy quotas
is a step in the wrong direction (paragraph 79).

The Government supports the substantial reduction,
with a view to phasing out, of all forms of export subsidies and
substantial reductions of import tariffs. We are committed to
continue negotiating with other WTO members to achieve a successful
agreement on these issues in the ongoing WTO negotiations on agriculture.
We support the need for reform of the diary and sugar market regimes
including the abolition of dairy quotas (see also replies to paragraphs
108, 109 and 112).

117. Where reform of European agriculture
policy and the introduction of the "Everything But Arms"
agreement harms the incomes of countries which are dependent on
the high prices maintained in the EU market through long-standing
preferential access agreements, the EU's development effort to
diversify the economies of these countries should be intensified
(paragraph 80).

The Government is working with multilateral and other
bilateral agencies to build trading capacity within developing
countries so that they are better able to compete on the world
markets. For example, we are working with some ACP countries,
such as Barbados, to help them adapt for the reform of the EU
sugar regime once the EBA agreement is fully implemented.

119. An important conclusion to be drawn from
the evidence presented by less developing country and development
agency representatives is that reduction of subsidised competition
and the lowering of import barriers is only part of the solution
to the problem of increasing the agricultural trade of developing
countries. As important is the removal of health, technical and
quality obstacles. We therefore recommend that more emphasis should
urgently be given to development projects which will assist less
developed countries to meet EU health, safety, quality and labelling
requirements (paragraph 81).

We agree that more emphasis should be given to help
developing countries in the area of standards. We work with a
number of multilateral agencies and in particular through the
Standards and Trade Development Facility of the World Bank with
the WTO, FAO, and WHO which delivers capacity building to developing
countries to meet the Doha objectives. DfID also supports developing
country representation at a number of international committees
to support the interests of developing countries and ensure that
their views are taken into account in the standards-setting process.
The European Commission has a number of development assistance
projects on Sanitary and Phytosanitary (SPS) and Technical Barriers
to Trade (TBT) matters, which DfID contributes to.

120. It is essential that the cross-compliance
measures and the closely allied Farm Advisory system recommended
in the mid-term review proposals are sufficiently effective to
ensure that possible intensification stimulated by the reduction
of support to production is discouraged (paragraph 90).

On cross-compliance: The Government anticipates
that the overall effect of de-coupling will be to reduce the incentive
for production. We acknowledge that a degree of intensification
may ensue, but other farms may see significant reductions in the
intensity of production and problems of under-grazing. We are
continuing to work to establish a meaningful set of cross-compliance
conditions attached to Pillar I payments to counter potentially
negative environmental effects. The proposals envisage that the
redeployment of some Pillar I funds to Pillar II schemes will
target money at increasing environmental protection and enhancement.
Furthermore, in the event of changing land-use practices, there
are a number of existing policy mechanisms which provide safeguards
as well asincentives for enhancement of the environment.

On the Farm Advisory System: The Government
agrees with this view and with the related comments in paragraph
89 on the need for a flexible risk-based approach to environmental
regulation relying more on self-regulation and effective delivery
of advice. The government does not consider that the Commission's
proposed farm advisory system would fit well into this model,
and is pressing for changes designed to yield better value for
money and promote more effective outcomes.

121. The switching of funds from support of
production to structural, environmental and other Pillar 2 considerations
proposed by the Commission amounts to only a possible total of
1.5 billion for the EU15 by the end of a seven year period.
We consider that this is inadequate to have any noticeable effect.
We therefore recommend thatsubject to careful monitoring
and assessment of value for moneythe modulation percentage
should be considerably more than the maximum of 19 per cent proposed
under the Commission's "degressive modulation" proposal
of 21 January 2003 and that the time allotted to reach the full
figure should be considerably less than what has now effectively
become ten years. We deplore the delay in the application of this
measure until 2007, as recommended in the January modification
of the Commission's proposals (paragraph 91).

The Government agrees that the proposed level of
modulation funds to be made available for rural development may
not be sufficient for a strengthened second pillar. We are therefore
continuing to press for a faster and larger transfer of funds
to the second pillar.

122. A revised CAP should be less complicated,
less bureaucratic and less centralised. It should offer farmers
more choice about how to run their businesses. In this respect
these proposals fall far short of the Commission's commendable
intentions to deliver such reforms (paragraph 92).

We agree with the Committee's assertion that a revised
CAP should be less complicated, less bureaucratic and less centralised.
Decoupling will lead to significant simplification for farmers,
the industry, and the various agencies involved in distributing
and enforcing the CAP. We also agree that CAP reform will offer
farmers more choice, as they will be able to optimise their production,
as it will be market oriented. Although we would have liked the
Commission's proposals to go further, we do not believe they fall
short of the Commission's intentions, as they do go a long way
in the direction of developing a sustainable, simplified and market
oriented common agricultural policy.

123. If environmental measures are to be effective
it is important that, rather than being of an essentially prescriptive
nature, the new policies envisaged within the mid-term review
proposals should be designed to encourage and reward good land
management. We recommend that the type of subsidised "best
practice" measures being developed in the UK and in some
other EU Member States should be adopted at the general European
level (paragraph 93).

The Government agrees that rural development measures
should be sufficiently flexible to allow Member States to target
rural development priorities including good land management. 'Agri-environment
measures are a compulsory requirement of Rural Development Programmes.
To ensure agri-environment schemes reflect the varying needs and
characteristics of each Member State, the responsibility for scheme
design should remain at Member State level. The Government agrees,
however, that having such agri-environment measures should continue
to be a compulsory element of Rural Development Programmes. The
Government will consider, in advance of decisions on the next
EU Financial Perspective, whether further changes are needed to
the EU framework to ensure that a consistently high contribution
to objectives such as the protection of biodiversity are made
across the EU's Member States.

124. Early agreement and the application
of the Commission's cross-compliance proposals is if anything
more urgent in the new Member States than in the EU15. This is
because there are many habitats and species still surviving in
Eastern Europe which are now rare in the west. Faire to apply
effective cross-compliance measures could result in these being
endangered by the intensification in these regions (paragraph
48).

The Government supports the principle of cross-compliance,
which, among other things, seeks to establish minimum standards
for environmental conditions on farms. Under the current proposals,
farmers would also have to ensure minimum maintenance levels to
avoid deterioration of habitats.

While the Government acknowledges that there may
be a number of vulnerable habitats and species in Eastern Europe,
we envisage that effective implementation of all relevant EU legislation
in accession States, and not only that which relates to cross-compliance,
would ensure that habitats and species are adequately protected.